Shares issued for business purchased
Shares issue for business purchased is also known as issue of shares other than cash or shares issued for non-cash consideration.
Generally, company purchases similar types of business.
When the company purchases business from other company, purchase consideration is fixed.
Company can pay this purchase consideration by issuing equity shares and debentures and partial cash.
While issuing shares, it may be at par, at discount or at premium.
Sometimes purchasing company purchases only assets from Vendor Company.
Sometimes, purchasing company purchases both assets and liabilities.
While purchasing business, there may be capital reserve or goodwill; it is calculated as balancing figure.
Purchasing company can issue some shares to public for cash.
Company issues these shares on lump-sum basis at par, at discount or at premium.
Net value or purchase consideration = Total assets – Total liabilities |
|
Purchase value = Net value Purchase value > Net value Purchase value < Net value |
neither goodwill nor capital reserve goodwill capital reserve |
Sometimes numbers of purchasing shares are given in the question and sometimes purchase consideration is given.
If numbers of shares are not given, following formula can be applied:
Number of shares (If shares are issued at par) = Purchase consideration ÷ Par value per share
Number of shares (If shares are issued at discount) = Purchase consideration ÷ (Par value per share – Discount)
Number of shares (If shares are issued at premium) = Purchase consideration ÷ (Par value per share + Premium)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 32
AB Company Ltd purchased following assets and liabilities from XY Company by issuing 10,000 equity shares of Rs 100 each at 10% premium:
Plant and machinery Rs 500,000 Stock Rs 400,000 Bills receivable Rs 200,000 |
Equipment Rs 150,000 Sundry creditors Rs 50,000 Bills payable Rs 30,000 |
Purchasing company also issued 5,000 shares to public at 10% discount.
Required: Journal entry in the book of AB Company Ltd
[Answer: Capital reserve = Rs 70,000]
SOLUTION:
Purchase consideration = 10,000 shares x (Rs 100 + 10 P) = Rs 11,00,000
Journal Entries
In the book of Purchasing Company
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Business purchase |
|
|
|
|
|
Business purchase account To XY Company account (Being- business purchased) |
Dr
|
|
11,00,000
|
11,00,000
|
|
Assets and liabilities taken |
|
|
|
|
|
Plant and machinery account Stock account Bills receivable account Equipment account To Capital reserve account (b/f) To Bills payable account To Sundry creditors account To Business purchase account (Being- assets and liabilities taken, balance as capital reserve |
Dr Dr Dr Dr |
|
5,00,000 4,00,000 2,00,000 1,50,000 |
70,000 30,000 50,000 11,00,000
|
|
Purchase consideration paid |
|
|
|
|
|
XY Company account To Share capital account To Share premium (security premium) (Being- payment made by issuing 10,000 equity shares @ Rs 100 each at 10% premium) |
Dr
|
|
11,00,000 |
10,00,000 1,00,000 |
|
Shares issued to public |
|
|
|
|
|
Bank account Discount on issue of shares account To Share capital account (Being- 5,000 shares issued to public at 10% Discount) |
Dr Dr
|
|
4,50,000 50,000 |
5,00,000 |
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PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
Basic Problem: 32
AS Company Ltd issued 27,000 equity shares of Rs 100 per share to purchase following assets and liabilities of MC Traders:
Land and building Stock |
Rs 200,000 Rs 600,000 |
Equipment Creditor |
Rs 500,000 Rs 200,000 |
10,000 shares issued to public subscription at 20% premium.
Required: (a) Journal entries; (b) Balance sheet
[Answer: Capital reserve = Rs 2,00,000]
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